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Commentary: Inside China's New Trade Deal

Changes in film quotas reveal China's private sector wants much the same as Hollywood.

Make no mistake, while making great political capital for vice presidents Joe Biden and Xi Jinping, the recent trade deal between the US and China was all about business.

It brings to an end several years of wrangling. This had seen the U.S. haul China in front of a trade disputes panel at the World Trade Organization (WTO), win the case, and then win again on appeal. But such high profile tactics made China dig in its heels, claiming that cultural matters should be a no-go area for trade talks.

Solving the WTO problem in a way that made both parties come out looking good should allow movie companies on both sides of the Pacific to quickly get back to commerce.

And while there may be some lingering doubts about how Chinese officials feel about the deal — after all cabinet level Chinese politicians have frequently involved themselves in censorship and other film industry minutiae — the Chinese industry seems ready to welcome the deal.

In terms of film import quotas, the new deal in one way only crystallizes the prevailing reality. While the official quota limited the number of foreign films that could share revenues from the Chinese box office to just 20 per year, that figure had often been exceeded in practice. And where the new deal creates an additional category for 14 3-D and IMAX films (which it describes as “enhanced”) these were the films already getting special treatment.

The new deal is about more than IMAX and 3-D and represents a real 70% expansion of the revenue sharing quota. That’s because if an “enhanced” movie is approved for import, copies of its regular format version can also be released on the same terms.

The U.S. Trade Representative negotiators did not succeed in dislodging China Film Group (CFG) as the sole authorized distributor of revenue sharing movies, so Hollywood’s studios will not be setting up their own theatrical releasing outposts just yet. But, given that the CFG is still responsible for taxes and marketing costs of the films it handles, the proposed change represents a huge win financial for Hollywood.

Movies imported and released under the revenue sharing quota have until now paid the underlying rights holder on a sliding scale, just 13%-17.5% of box office revenues, depending on success. The new deal, apparently negotiated until the very last, will see that proportion rise to 25%.

Interestingly, while in many other sectors of business, the U.S. imports more from China than it exports. But in the entertainment sector it is China that has the trade deficit. And while the new Biden-Xi deal appears on the surface to tilt the balance of trade further in Hollywood’s favo r that is to forget that there are plenty of Chinese firms that make money from showing US movies.

Not least of these is CFG, the state owned enterprise that is the single biggest player in the Chinese industry. It will earn a smaller percentage distribution fee on each movie, but the deal guarantees it a greater number of titles to release. Moreover, with the trade dispute solved and CFG’s place as distribution kingpin seemingly secured, CFG can finally press ahead with the initial public offering that it has been touting for the past several years.

So, whether or not the majority of tickets sold are for Chinese or American movies — last year with a bit of market manipulation Chinese titles had a 52% share of their own box office — it is in the interest of CFG that the market keep growing.

That is even more true of the hugely ambitious private sector companies that have emerged in the ten years since China started reforming the film sector. After all, they do not have the luxury of CFG’s quasi monopoly on releasing revenue-sharing films.

Companies like Huayi, Beijing Enlight and NASDAQ-listed Bona have invested hundreds of millions of dollars building theaters and producing big-budget movies. Wanda, a massive property developer, has become the country’s largest exhibition chain and in order to secure the volume of titles it needs to keep its turnstiles spinning, has expanded into film production and financing. (Wanda was also responsible for last year’s record breaking order for 75 IMAX screens.) Still others such as LeTV have moved upstream into feature production from a base in online video.

Just a few years ago Western companies such as Warner Bros. and Columbia TriStar Film Production Asia sought and failed to make much headway in China. Now Chinese companies are just as keen to enforce rights, neutralize piracy and expand the number of releases as any Hollywood studio.

Each of these companies has felt the crimp of the Chinese government’s controls — whether it is a censorship rules that outlaw ghost stories and political thrillers or an industry regulator that says what films can be released at what time of year — and sometimes they have pushed back.

And as these represent local interests, rather than those of “barbarians at the gate” (i.e. foreigners), they are harder for the Chinese government to resist.

Bona delivered an example of that just last month. While the government has for years resisted the introduction of a film rating system, Bona recently said that it will introduce its own classification system to help audiences decide which movies are suitable for which audiences.

These private sector companies, aggressive state owned enterprises and a mixture of public and private sector film funds are now pushing into international co-production with Hollywood studios and with independent partners. Witness DreamWorks Animation’s venture with Shanghai Film Group.

The newly minted Chinese moguls are hungry for the kind of glory that the Oscars bring and are jealous of the global reach of the US studios. Some seem to have decided that the attempt to export Chinese films is an uphill struggle when Chinese-themed films can instead be made in English and distributed for them by Hollywood.

It was smart of the U.S. negotiators to shift the debate from away from culture and on to trade.

And it would be hard for China to claim to be a less developed country while its entrepreneurs simultaneously hatch plans to buy themselves chunks of Tinseltown.

Patrick Frater is CEO of Film Business Asia, a specialist Asian industry journal and consultancy.